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Monday, April 25, 2011

FAIR COMPETITION: THE ENGINE OF ECONOMIC DEVELOPMENT

"When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life.”

It was in 1377, that the Arabian economic thinker Ibn Khaldun provided this definition of economic growth and development in his seminal work Muqaddimah (known as Prolegomena in the Western world).Since then, modern economics has undergone a sea change in terms of defining growth development and other virtues but the basic ideal of economic development -its purpose and intent- has always been the same.

This concept of economic development has undergone a major transformation since the early parts of the starting of modern era. The age of new discovery, signaled the arrival of the mercantilist era. In this age economic development was defined as the net aggregate increase in the item that was under circulation e.g. gold and silver. This was called the bullionist theory. The world saw a scamper for gold and other resources which could create wealth in gold. Trade was the source by which nations could increase wealth and thus ensure growth. The European nations began to search new markets in Asia, Africa and America. This rise in trade and scamper for new markets was coupled with the evolvement of the factory system in the 18th century.

It was in opposition to this bullionist theory that the modern classical theory of economic development was promulgated by thinkers like Adam Smith. This was centered on the debate of what would actually constitute the true measure of growth, the trade nations indulged in or the manufacturing process. The neoclassical theory of economic development which followed the classical model examined growth and development as a series of complex equations which showed the relationship between labor-time, capital goods, output, and investment. In the 1980’s and early 1990’s this theory was further refined by the by economists who worked to "endogenize" technology in the 1980s.

They developed the endogenous growth theory that includes a mathematical explanation of technological advancement. This model also incorporated a new concept of human capital, the skills and knowledge that make workers productive. Unlike physical capital, human capital has increasing rates of return. Therefore, overall there are constant returns to capital, and economies never reach a steady state. Growth does not slow as capital accumulates, but the rate of growth depends on the types of capital a country invests in. Research done in this area had focused on what increases human capital (e.g. education) or technological change.

And in 1998 Amartya Sen shot into focus with his pathbreaking concept of welfare economics which reshaped the post-modern definition of economic development. Moving away from the traditional definition of trade and surplus economic development was now defined as a holistic concept. It was a revolutionary contribution to development economics and social indicators. Sen’s theory centered on the concept of 'capability' developed in his article "Equality of What." He argued that governments and economies should be measured against the concrete capabilities of their citizens. This is because top-down development will always trump human rights as long as the definition of terms remains in doubt (is a 'right' something that must be provided or something that simply cannot be taken away?). Thus the most important parameter of economic development was the freedom of choices. Any economy is said to achieve success when it can offer its citizens opportunities and choices. These choices can range from the most basic of needs to infrastructure.

It was from this point onwards that the post modern theory of economic development has undergone a major transformation. Economic development is now not merely measured in terms of GDP but as combination of wide range of factors. It takes into account the infrastructure available, the availability of food, the availability of basic amenities like health facilities, sanitation facilities etc. And this is linked to the surplus generated in trade and other activities which is used back to improve the human infrastructure. Thus growth has been interlinked with human welfare. Economic growth has ceased to be the prerogative of a country but the “right” of its citizens. And it is in this context that the term “fair competition” as a engines for economic development, must be understood and judged.

Fair Competition is the ideal (utilitarian or welfare) that liberalism tells us to strive toward, as a stable way to enhance any reflective dynamical system's informational state. Competition in itself is a very dynamic concept with no unique definition, except what is understood in common terms in the context of market and trade. In a way of defining competition can be stated to be something which is anti-theoretical to the concept of monopoly. Competition germinates a fairness of practices which encourages maximum growth including human development while unfair competition gives rise to ills that affect the health of economy in the long run.

Historically colonization has been the most apt example while defining the ills of an unfair competitive practice in economy. The Egyptians, Phoenicians, Greeks and Romans all built colonies in antiquity. Modern colonialism started with the Age of Discovery. Portugal and Spain discovered new lands across the oceans and built trading posts. For some people, it is this building of colonies across an ocean that differentiates colonialism from other types of expansionism. Soon Britain France and the Dutch joined this race and left everyone else behind.

These nations used a series of political economic and administrative tools in order to maintain supremacy in their colonies. A cursory glance at India’s economic development in the 19th century would give a fair idea of the ills of colonization. The per-capita income of India was drastically reduced after the East India Company took control of the Indian polity and economy. Authors like Dadabhai Naroji and RC Dutt argued that the colonial ruler drained India of its wealth. It was the colonial policies which lead to the progressive decline and ruin of Indian agriculture and local industries. This was the result of a deliberate policy to keep out Indian industries. Famines became a regular feature. Indian economy in every sense was ruined. This is a historical testimony as to how unfair competition or monopoly results in the destruction of an economy.

In recent times this unfair competition has emerged in many other forms like cartelisation. Cartelization has emerged as one of the most frequently committed crimes in today’s economic era. The latest example is the cartelisation in the cement sector. While this is not something new for this sector, what was surprising was the timing in 2009. In 2009 construction activity was going down, yet the cement manufacturers were able to raise their prices collectively. Whereas in steel, another important input in construction, a similar trend is not visible. Cement prices were been increased four times between January and November 2009. Matters came to such a head that the Builders Association of India had to issue press releases and notifications in financial dailies saying that the cartelisation by cement manufacturers was the root cause for the frequent price hikes.

Towards the end of 2007, the Monopolies and Restrictive Trade Practices Commission (MRTPC) had stated that the cement industry audits associations have been colluding for over 17 years. The Tamil Nadu Government even threatened to take over the sector. When the government allowed imports from Pakistan, the cement lobby raised the issue of Pakistani factories not having ISI license. Such was the extent of collusion in the cement industry. In view of the phenomenal rise in cement prices the construction industry was hit even more.

Another sector where the carteslisation hit the overall economy was the cartelisation in the tyre industry. When the truckers’ strike hit the nation in late 2008, the Road Transport Ministry issued half-page advertisements telling the public as to how wrong the strike was. One grouse of the All India Motor Transport Congress was the high prices of tyres due to cartelisation. In the advertisement, the Ministry had advised the truckers to approach the MRTP Commission with evidence to deal with the collusive behavior. This nationwide strike had adversely affected the movement of food and other items. Thus inflationary curve saw a rapid upward trend which hit the economy severely. Apart from these other unfair business practices include

Conspiring to Fix Market Prices-Discussing prices with competitors, even if it affects a small marketplace, may be construed as a violation of antitrust law.

Price Discrimination-Using dominant industry power to secure favorable product prices from buyers, even though such prices are unavailable to weaker companies in the same industry, is generally a violation of antitrust laws.

Conspiring to Boycott -Conversations with other businesses regarding the potential boycott of another competitor or supplier may violate antitrust law.

Conspiring to Allocate Markets or Customers -Agreements between competitors to divide up customers, territories or markets are illegal. This provision applies even when the competitors do not dominate the particular market or industry.

Whenever such events occur economic growth is stunted in the long run. It is for these reasons fair competition is a necessary and a sufficient condition for acting as an agent of economic growth. There is empirical evidence of the benefits of a fair competition regime vis-á-vis economic development, greater efficiency in international trade and consumer welfare listed in a report (UNCTAD1997). The evidence, albeit referring to experiences of developed countries, indicated substantial benefits from the strengthening of the application of competition policy principles in terms of "greater production, allocative and dynamic efficiency, welfare and growth."

It further concluded that the consumer and producer welfare and economic growth and competitiveness in international trade have all flowed out of competition policies, deregulation and surveillance over Restrictive Business and Trade Practices. Noting that competition rewards good performance, encourages entrepreneurial activity, catalyses entry of new firms, promotes greater efficiency on the part of enterprises, reduces cost of production, improves competitiveness of enterprises and sanctions poor performance by producers, the empirical evidence in the report suggests that competition ensures product quality, cheaper prices and passing on of cost savings to consumers. The report also observed that competition promotes two types of efficiencies, namely, static efficiency (optimum utilisation of existing resources at least cost) and dynamic efficiency (optimal introduction of new products, more efficient production processes and superior organizational structures over time) (UNCTAD, 1997). Analyzing the empirical evidence, the UNCTAD report had the following to say:

In the Netherlands, it has been calculated that the average annual consumer loss arising from collusive practices or restrictive regulations in several service sectors amounts to 4,330-5,430 million guilders (around $2.1-2.7 billion) (Hendrik P. van Dalen 1995). Data relating to the United States show that a bid rigging conspiracy for the sale of frozen seafood which was eventually prosecuted had an average mark-up over the competitive price over a one year period of 23 per cent (LukeM.Froeb et al. 1993) and the breakdown of price-fixing conspiracies in some industries has led to steep declines in manufacturing costs (Scherer and David Ross 1990). It is true that cartels may sometimes facilitate adjustment, but vigorous competition may sometime be as or more effective in forcing rationalisation of industries, particularly in larger markets (Scherer and David Ross 1990). An examination of some exempted rationalisation cartels in Germany (several different types of cartels are allowed under the German competition law, subject to certain conditions) found that they had promoted the viability of the producers in the industries concerned, but there was little evidence that they had contributed to productivity and efficiency improvements, while they had resulted in higher prices and less output (David B. Audretsch 1989).

Fair competition has a few major hallmarks which act as the engine to economic development. Fair competition induces sustainability in the economy. Sustainability can be explained in terms of carrying capacity. Sustainability ensures strength to the economy to carry forward its story of growth. For example let us take the example of the coal industry. Coal industries in India have rarely been able to produce quality coal vis-à-vis its availability. This is mainly due to the loopholes of the coal mining policy. Now in place of that a fair competitive process of coal which takes into concerns the environmental issues would result in better output of coal production. The draft policy of the new coal plan reflects this very spirit. A competitive spirit would ensure a fair and judicious use of resource which in turn will generate sustainability.

Fair competition induces innovation in the market. The Toronto Stock Exchange (TSE) was, for a century the dominant Canadian exchange. Suddenly in mid 90’s it found its outdated trading system was routinely overwhelmed by high volumes, resulting in frequent trading freezes. Canadian companies such as BlackBerry began listing on the New York Stock Exchange. New competitors entered the market. Pure Trading, a Toronto-based alternative market, launched a new exchange that offered an attractive fee structure and new trading technologies. An alliance of Canada’s largest banks announced another exchange. Most analysts believed three exchanges in Canada would be too much. Yet the competition was powerful, and today the TSE uses sophisticated trading software, with lower trading fees, and has recaptured lost liquidity. The Canadian stock market is far more efficient and user-friendly because of the 2000 competition.

Fair competition induces transparency in the market. Till the 1990’s Air India was the only flight airliner which was allowed to operate. It followed its own pricing regime which was not only high but also non transparent. With the advent of the open sky policy other airliners entered the fray. As soon as the other airlines entered the field the air travel prices came down drastically and the pricing regime became transparent. In the telecom sector too a similar pattern was observed and post- liberalization these two sectors have registered extraordinary growth.

Fair competition also introduces efficiency in the economy as well. With the entry of private educational health institutes in large number in many areas health has seen a major improvement. This human development is an integral part of the economic development as well. Since a healthy demographic population will act as the actors of the economic development.

With the advent of globalisation the world economies have been truly linked. In 2008 when the subprime lending crisis hit the US economy the world economy shuddered. Similarly when major banks failed is the economic crisis in the US in 2009 the crisis spilled over to Europe and one by one the European nations tumbled into crisis. This shows the deep relation the world has in terms of economy. Thus WTO and other organizations stress on greater interactions which ensures fair competition.

Recently negotiations took place and various compromises were reached in the Cancun Meeting of the Conference of Parties on Climate Change. The establishment of the Green Fund under the Copenhagen agreement has brought forward a new sense of rapprochement in the field of environmental negotiations. These developments should not be seen in isolation. Such negotiations stand on the ideals of “historical and shared responsibility” which in other words gives a sense of fair competition among the nations, with such protocols acting as great levelers. Environment is an integral part of sustainable development which fuels the engine of economic development. This sense of global camaraderieship has also transcended into other avenues like shared technology, economic cooperation blocs, opening of trade barriers etc. The Kyoto Protocol, the TRIPS agreement, the relaxation of patent rights all point towards a greater interaction among world economies which would ensure fair competition for all.

Thus we can see that fair competition has emerged as a global standard to ensure development. Nations must too equip itself to ensure a practice of fair competition. Keeping this objective in mind the MRTP(Monopolies and Restrictive Trade Practices Act), was established to prevent economic power concentration in form of monopolistic unfair and restrictive trade practices, in order to avoid damage to economy. However the MRTP Act did not have much teeth. Thus the Competition Commission of India (CCI)was established as a successor to the MRTP Act.

Institutions like the CCI must ensure that markets work well for the consumers. The advantages to various sectors arising out of competition should percolate to consumers and businesses for level playing field, redress against anti-competitive practices, competitively priced inputs and optimal realization from sale of assets.

As the 21st century dawns on mankind, man has witnessed rapid development in all fields. These developments have made man’s life better and more comfortable than what it was a hundred years ago. With the passage of time growth and development has touched not only the rich but everyone else. Better infrastructure, better healthcare, better education, more opportunities for growth.21st century has truly been the story of mankind’s achievements. Yet man has a long way to go since even these developments have loopholes that have to be rectified. And this change can be brought forward by a sense of fair competition, a system where aspirations are fulfilled, where growth and opportunities would be prerogative of all. Fair competition truly acts as the engine of economic development. The hope that fair competition generates can be summarized in the following quote:

“In 20th century majority of the people believed that life would be better......The best part is that they know they can achieve it.”